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The Paradox of Real Estate

The Paradox of Real Estate
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Friday, 25 May 2018 10:00 AM Current | Bio | Archive

There’s an old investment saying: This time is different.

The connotation of the saying is foreboding. When this time is different, it seems that there’s a new paradigm where everybody wins and no wrong can ever be done.

That’s not necessarily the case, however. What sounds like a new normal is simply a bullish status quo that gets gored by the next inevitable bear market.

Recently, I’ve been talking with a few folks across my network on various issues. More than a few have had a few things to say about real estate.

Consider this nugget from a couple that’s just gotten their last child through college:

“We’d like to downsize, of course, but we don’t want to pay so much for less space.”

That reflects the idea that, thanks to generally rising home prices across the nation in the past five years, some markets have done better than others and have since gone on to new highs.

The question for folks fortunate enough to own in such markets, however, is where to go from here. Moving within the same market makes sense, especially during one’s prime income-generating years. But while many folks like to see their home appreciate, they don’t want to overpay on the buy side as well.

What a refreshing break from just a decade ago! At the height of the housing bubble (the time was different, after all), investors had no qualms about buying homes at all-time highs in the expectations of getting to make some small cosmetic changes and flip them for a profit in the span of a few months.

That’s a trader mentality, and it just doesn’t work with housing. Yes, real estate can be an asset. And for most Americans, a home may end up being their largest asset by the time the mortgage is paid off. But at the wrong price, real estate can also be a tremendous liability, as all too many have learned.

That’s why, today, we have the paradox of real estate. Homeowners see the gains of the past few years, but have few good opportunities to take advantage of home equity.

Even if you’re a homeowner looking to stay put, it’s a bit of a paradox as well. Home equity is an asset, and a 30-year fixed rate mortgage is the best financing deal you can get unless you’re a corporation with a high credit rating.

A decade ago, many homeowners used home equity often thanks to faster-appreciating prices. That led to the joke about homes being used as ATM’s.

Today, however, homeowners have gone from being willing to tap their equity just about any time, to thinking long and hard about whether they want to milk their home like a cash cow under nearly any circumstance. That even includes refinancing home debt to pay down higher-interest loans like a car or credit card debt and lower total payment costs.

Again, that’s the paradox at work. The value is there. With interest rates on the rise, but still close to historic lows, any opportunity to get locked into a fixed-rate, long-term loan should be taken advantage of. That’s true even if you’re looking to pay down the mortgage faster. If some financial issue comes up, you can always scale back to the minimum payment and go from there.

So what am I telling folks in my network about selling their homes right now? Maybe, but maybe not. It depends on many factors. The price you can get, and the price you would need to pay for a new property are just two big pieces in the puzzle. But they’re far from the complete picture.

I do think it’s a perfect time for folks in high-taxed states like New York, New Jersey and California to consider lower-taxed locales. Such places also tend to have lower housing prices. But that’s not an in-town move. It’s a considerable life change with many other factors besides far cheaper housing and far lower taxes, especially for folks still climbing high on the career ladder.

But for the price of a monthly one-bedroom in Manhattan or part of a shipping container in the Oakland Bay, you can buy a comfortable 3 bedroom house in most of the country. Given the political restrictions on new housing in those areas, shortages of quality housing there will likely continue indefinitely.

For high-earners in those outlier states, buying a second property in a lower-tax area may provide a stepping stone for a future move. In the meantime, it could be rented out and could provide some income.

These are obvious ways to use real estate as a potential tax-saving asset—which is where it can provide some of the best value right now. For folks looking to move in town, it’s still largely a seller’s market. Look for beaten-down quality where a few post-purchase repairs can be made to improve a bargain price.

I won’t go as far as others and say we’re in a new real estate bubble. People are treating homes much more like a safe, steady blue-chip stock compared to a decade ago. But we are in another era of rising values, and finding safe and effective ways of enjoying but also nurturing that value is a challenge.

Take advantage of “low-ish” interest rates while you can, and consider new purchases in real estate markets that offer lower tax footprints in up-and-coming areas. For extra safety, consider the local rental market and only look at properties that can be rented at breakeven or a profit in the meantime.

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and writes the monthly newsletter Crisis Point Investor.

© 2019 Newsmax Finance. All rights reserved.

   
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AndrewPacker
At the height of the housing bubble (the time was different, after all), investors had no qualms about buying homes at all-time highs in the expectations of getting to make some small cosmetic changes and flip them for a profit in the span of a few months.
paradox, real estate, investment, interest, rates, housing
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2018-00-25
Friday, 25 May 2018 10:00 AM
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